Supreme Court clarifies the process for payment of Resolution Professional fees in Corporate Insolvency Cases: Devarajan Raman vs. Bank of India Limited (2022) INSC 142 (05 January 2022)

Introduction

Date of the Judgment: 05 January 2022

Citation: (2022) INSC 142

Judges: Dr Dhananjaya Y Chandrachud, J and A S Bopanna, J

What happens to the fees of a Resolution Professional (RP) when the Corporate Insolvency Resolution Process (CIRP) is overturned? The Supreme Court of India addressed this question in a recent case, clarifying the jurisdiction of the National Company Law Tribunal (NCLT) in determining the costs and fees payable to the RP. This judgment emphasizes that the NCLT must properly assess the claims of the RP based on the agreed terms and not arbitrarily fix the amount. The judgment was delivered by a two-judge bench of Dr Dhananjaya Y Chandrachud, J and A S Bopanna, J.

Case Background

The case involves a dispute over the payment of fees and expenses to Mr. Devarajan Raman, who was appointed as an Interim Resolution Professional (IRP) for Poonam Drums and Containers Private Limited. The Bank of India Limited, a financial creditor, initiated the CIRP against the company. Mr. Raman submitted his bid on 5 February 2019, and was appointed as IRP on 20 September 2019 by the NCLT. However, the NCLAT overturned the NCLT’s order on 19 December 2019, remitting the matter back to the NCLT to decide on the IRP’s fees and costs. Mr. Raman submitted a claim for ₹14,75,660, of which ₹5,66,667 was reimbursed, leaving a balance of ₹9,08,993. The NCLT fixed the fee at ₹5,00,000 plus GST, which was challenged by Mr. Raman.

Timeline

Course of Proceedings

The NCLT initially appointed Mr. Raman as the Interim Resolution Professional. This order was challenged and set aside by the NCLAT, which remitted the proceedings back to the NCLT to determine the costs and fees incurred by Mr. Raman during the CIRP. Mr. Raman then filed an application before the NCLT for the release of his remaining fees and costs. The NCLT, however, did not consider the actual claim and instead fixed an ad hoc amount of ₹5,00,000 plus GST as the fee. This order was appealed before the NCLAT, which upheld the NCLT’s decision, stating that the fixed amount was reasonable. Mr. Raman then appealed to the Supreme Court.

Legal Framework

The judgment refers to Section 60(5)(c) of the Insolvency and Bankruptcy Code 2016, which grants the adjudicating authority (NCLT) jurisdiction to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings of a corporate debtor. Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 defines “insolvency resolution process cost” to include the fees of the resolution professional and other professionals appointed by the RP. The Insolvency and Bankruptcy Board of India circular dated 12 June 2018, requires the insolvency professional to ensure that the fees payable are reasonable and that the approval of the Committee of Creditors (CoC) is obtained where required.

Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: “34.Resolution professional costs.—The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs. Explanation.—For the purposes of this regulation, “expenses” include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.”

Arguments

Appellant’s Arguments (Mr. Devarajan Raman):

• The fee and expenses claimed were based on the technical and financial bid submitted by the appellant.
• The fourth CoC meeting had ratified all expenses up to 30 November 2019.
• The respondent bank, in its letter dated 24 January 2020, admitted that the fee and expenses were admissible after verification.
• The NCLT did not scrutinize the factual position and awarded an ad hoc figure.
• The appellant worked as an IRP for three months, which is half the period of one hundred and eighty days envisaged for completing the process.
• Relied on the decision of the Supreme Court in Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787] to argue that the adjudicating authority has jurisdiction under Section 60(5)(c) of the IBC, which was not properly exercised.

Respondent’s Arguments (Bank of India Limited):

• The appellant accepted the order of the NCLAT remitting the proceedings back to the NCLT for determining the costs and fee payable to the RP.
• The payment made to the RP is commensurate with the work done over a period of three months.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

• Whether the NCLT and NCLAT had properly exercised their jurisdiction in determining the fee and costs payable to the Resolution Professional, particularly when the CIRP was set aside.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

• Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787] – Supreme Court of India.
  • The Supreme Court held that the adjudicating authority has jurisdiction under Section 60(5)(c) of the IBC to determine the amount payable to an expert valuer as part of the CIRP costs.

Legal Provisions Considered:

• Section 60(5)(c) of the Insolvency and Bankruptcy Code 2016: This section grants the NCLT jurisdiction to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings of a corporate debtor.
• Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: Defines “insolvency resolution process cost” to include the fees of the resolution professional and other professionals appointed by the RP.

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787]* to reiterate that the NCLT has jurisdiction to determine the costs payable to the RP.
• The Supreme Court explained that Section 60(5)(c) of the Insolvency and Bankruptcy Code 2016* provides the NCLT with the necessary jurisdiction to decide on the fees and costs of the RP.
• The Supreme Court explained that Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016* defines the expenses of the RP as part of the insolvency resolution process costs.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the lack of reasoning and proper assessment by the NCLT and NCLAT in determining the fees and costs of the Resolution Professional. The Court emphasized that the adjudicating authority must consider the agreed terms, the technical and financial bid, and the approval of the CoC. The Court was also influenced by the fact that the respondent had initially agreed to the fees and costs claimed by the appellant. The court noted that both the NCLT and NCLAT had acted in an ad hoc manner, without providing any basis for their decisions. This showed a clear abdication of their responsibility to properly assess the claim.

Logical Reasoning:

The Supreme Court considered the fact that the NCLT and NCLAT did not provide any reasoning for fixing the fee at ₹5,00,000, and that the respondent had initially found the claim to be admissible. The Court also considered the legal provisions and precedents, such as Section 60(5)(c) of the IBC and the Alok Kaushik case, which establish the NCLT’s jurisdiction in such matters. The Court rejected the respondent’s argument that the payment was commensurate with the work done, as there was no basis for this assertion.

The Court stated:

“The order of the NCLT, however, reveals that none of the submissions of the appellant have been considered. The adjudicating authority merely directed the respondent to pay the expenses incurred and an amount of Rs 5,00,000 plus GST towards the fee of the RP. Neither the basis of the claim nor its reasonableness has been considered by the adjudicating authority.”

“Both the orders suffer from an abdication in the exercise of jurisdiction. In the absence of any reasons either in the order of the NCLT or the appellate authority, it is impossible for the Court to deduce the basis on which the payment of an amount of Rs 5,00,000 together with expenses has been found to be reasonable.”

“In the present case, after the NCLAT set aside the order of the NCLT initiating the CIRP, the proceedings were remitted back for determining the insolvency resolution costs. It is material to note that the appellant had addressed a letter to the respondent on 13 December 2019 prior to the filing of the application to which the respondent responded on 24 January 2020 stating that, upon verification, the costs and fees were found in conformity with both the technical and financial bid, based on which the assignment was awarded.”

Key Takeaways

• The NCLT must properly assess the claims of Resolution Professionals for fees and costs based on the agreed terms, technical and financial bids, and approval of the CoC.
• Adjudicating authorities cannot arbitrarily fix the amount of fees without providing reasons or considering the basis of the claim.
• The NCLT has jurisdiction under Section 60(5)(c) of the IBC to determine the fees and costs of the RP, even if the CIRP is set aside.
• This judgment emphasizes the need for transparency and accountability in the determination of fees and costs in insolvency proceedings.

Directions

The Supreme Court set aside the judgments of the NCLAT and NCLT. The matter was remitted back to the NCLT for a fresh decision. The NCLT was directed to expedite the disposal of the matter within one month from the date of receipt of a certified copy of the order.

Development of Law

The ratio decidendi of this case is that the adjudicating authority, while determining the fees and costs of the Resolution Professional, must not act arbitrarily. The authority must consider the relevant facts, such as the technical and financial bid, the approval of the CoC, and the actual expenses incurred by the RP. This judgment reinforces the principles of transparency and accountability in insolvency proceedings and clarifies the scope of the NCLT’s jurisdiction under Section 60(5)(c) of the IBC. The Supreme Court has reiterated the position of law as laid down in Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787].

Conclusion

The Supreme Court’s judgment in Devarajan Raman vs. Bank of India Limited clarifies the procedure for determining the fees and costs of a Resolution Professional in corporate insolvency cases. The Court emphasized that the NCLT must properly assess the claims based on the agreed terms and not arbitrarily fix the amount. This judgment ensures that the Resolution Professionals are fairly compensated for their work, while also maintaining the integrity of the insolvency process.